I founded the investment newsletter, Asia Confidential, in July 2012. Prior to this, I was a fund manager, stockbroking analyst and journalist in Asia for 13 years. Most recently, I spent two years as a portfolio manager for Asian equities at AMP Capital. For five years before AMP, I was a research analyst at Asian brokerage, CLSA, where I covered multiple sectors in Hong Kong, Singapore, Australia, Malaysia and Indonesia. And in a former life, I was a television and radio news journalist at the Australian Broadcasting Corporation.

Why Are Asia's Markets Trailing The World?

It’s a curious thing when the world’s biggest growth market, Asia, has dramatically underperformed American and European stock markets, this year and over the past 12 months. Particularly as it should be a key beneficiary of any green shoots of global economic recovery. More curious still is that Asia’s most cyclical markets – China, South Korea, Taiwan and Malaysia – which should be the largest winners from any economic pick-up, have been among the worst performers in Asia.

How can this be? There appear to be four factors at play: 1) there’s little evidence of an economic upswing in the region 2) yen depreciation has altered the landscape for key export competitors in Asia 3) there are fears over inflation and tighter monetary policy in key economies such as China 4) politics has played a part with leadership transitions in China and South Korea adding to policy uncertainties. Asia Confidential doubts these factors will turn around this year and suggests investors stick to countries/stocks exposed to domestic consumption and which are available at a reasonable price – such as India, Thailand banks and Singapore dividend plays.

Lagging Asian markets

While the so-called animal spirits are back in the U.S. as the Dow reaches new highs, the same can’t be said for Asia. This year, Asia (ex Japan) has barely budged, up just 0.2% (as at March 14). That compares with increases in the MSCI World, S&P 500 and Europe’s Stoxx indices of 6.8%, 9.4% and 5.8% respectively. Granted that we’re only 10 weeks into the year. But even over the past 12 months, Asia’s 3.1% return has badly lagged that of MSCI World, S&P 500 and Europe’s Stoxx at 9.5%, 11.5% and 6.6% respectively.

And Asia’s supposed to be the world’s largest growth market! Delving deeper into the numbers though, it’s evident that there’s somewhat of a north-south divide when it comes to stock market returns. South-East Asia has continued its barnstorming run, with the Philippines, Indonesia and Thailand again leading the way, up 17.4%, 12.4% and 9.5% year-to-date (YTD) in USD terms respectively.

Some of the laggards have been in the more export-oriented economies in North Asia. China has been the second-worst performer in U.S. dollar terms this year. That’s after being the worst performing Asian market last year. South Korea has also been a poor performer. The other lagging market, Malaysia, is the primary exception to north-south divide. Though it is one of the region’s heaviest exporters.

The MSCI Asia-ex Japan index detailed in the table below gives heavier weightings to larger economies such as China, South Korea and Taiwan. Being poor performers, they’ve helped to drag down the performance of the overall Asia index.

It’s also interesting to note some of Asia’s cheapest valuations are now found in some of the most export-dependent countries, principally China and South Korea.

Possible explanations

At first glance, Asia’s poor relative performance seems somewhat counter-intuitive. After all, there is seemingly a recovery in the world’s largest economy, the U.S., and some stabilisation in the worlds’ second largest economy, China. Shouldn’t Asia, a growth market still heavily reliant on exports, be benefiting from this? And shouldn’t the region’s most export-dependent countries, be among the largest beneficiaries?

For us, there are four reasons for Asia’s under-performance:

1) Though data in some developed markets suggests global economic growth is picking up, there’s little evidence of that in Asia. Many will point to the recent surge in Chinese exports as evidence, but this writer would beg to differ. Though official figures suggest China’s exports increased by 22% in February, many sell-side analysts have rightly caste doubt on the figures. They point to strong China money inflows, which suggests exporters overstated their business to get funds back into the country and avoid capital restrictions.

Importantly, more reliable export figures from South Korea and Taiwan indicate little in the way of recovery. In February, South Korean exports fell 8.6% year-on-year (YoY). Combining January and February, thereby smoothing out the impact of the Lunar New Year, exports from South Korea grew 0.6% YoY, marginally better than the 0.4% decline recorded in the fourth quarter of last year.

Similarly, Taiwan exports in February fell 15.8% YoY. Combining January and February, exports increased 2.1% YoY compared with the 2.5% rise recorded in the fourth quarter last year.

2) The substantial fall in the Japanese yen is beginning to impact key exporting rivals in Asia, including South Korea and Taiwan. These countries sell similar products to Japan and they’re not only significant exporters to nations outside Asia but also to Japan itself. Yen depreciation explains some of the weakness in the export figures of these countries. It certainly explains much of the weakness in their stock markets.

Source: Bloomberg

3) There are concerns about tighter monetary policy given rising inflation in some countries. Developed markets continue to benefit from easy money policies with interest rates still at very low levels. In Asia, the cycle of lower interest rates appears to be coming to an end. This is particularly the case in China, where there are growing concerns of a credit bubble and with inflation again rearing its head. Credit tightening in China is already happening and interest rate rises may soon be on the way.

4) Political uncertainty hasn’t helped. In China and South Korea, the new leaders are still settling in and any significant economic reforms are yet to be pushed through. In Malaysia, an election looms and the current government’s hold on power looks decidedly shaky. Investors have been fearful of the uncertainty that a potential regime change may bring.

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